Payment Bonds vs. Performance Bonds: What Contractors and Businesses Need to Know in 2025
Large-scale projects in construction, transportation, and regulated industries often require surety bonds before work begins. Two of the most common are payment bonds and performance bonds. Both protect stakeholders from financial loss, but they serve different purposes and cover different risks.
Understanding these differences helps you meet legal requirements, protect relationships with clients and suppliers, and position your business for bigger opportunities.
What Is a Payment Bond
A payment bond guarantees that subcontractors, suppliers, and laborers will receive payment for their work and materials. If a contractor fails to pay them, the bond ensures they are compensated.
Key facts about payment bonds:
- Protect subcontractors, suppliers, and laborers from nonpayment
- Often required on public works projects in the United States
- May be issued together with a performance bond under the same contract
Federal projects over $150,000 generally require payment bonds under the Miller Act. Many states have their own “Little Miller Acts” with similar rules.
What Is a Performance Bond
A performance bond guarantees that a contractor will complete a project according to the agreed contract terms, scope, and quality standards. If the contractor fails to perform, the project owner is compensated so they can hire another contractor to finish the work.
Key facts about performance bonds:
- Protect the project owner from losses due to contractor failure
- Ensure the completed work meets contract specifications
- Often issued alongside payment bonds for complete protection
Payment Bond vs. Performance Bond: Quick Comparison
| Aspect | Payment Bond | Performance Bond |
|---|---|---|
| Purpose | Ensures payment to subcontractors, suppliers, and laborers | Ensures project completion per contract |
| Beneficiary | Subcontractors, suppliers, laborers | Project owner |
| Claim Trigger | Nonpayment for work or materials | Failure to complete work per contract |
| Legal Basis | Miller Act and state equivalents | Project-specific contract terms |
Why Many Projects Require Both Bonds
Public agencies and private owners often require both payment and performance bonds to ensure:
- The project will be completed.
- All parties will be paid.
For example, if you win a $3 million public infrastructure project, you will almost certainly need both bonds before work begins. Working with a trusted surety partner such as Single Source Surety can help you prepare documents, secure approval faster, and avoid delays.
Qualification Requirements for Each Bond
While each surety provider sets its own requirements, expect to provide:
- Detailed financial statements prepared by a CPA
- Proof of relevant licenses and insurance
- Past project performance history
- References from suppliers and subcontractors
- Evidence of working capital and liquidity
A provider like Single Source Surety will evaluate your ability to perform the work and meet payment obligations before approving your bond.
Bond Premiums and Costs
The cost for payment or performance bonds is usually 1–3% of the contract value. Rates depend on:
- Project size and type
- Credit score and financial stability
- Contractor experience
- Previous bond claim history
For a $1 million project, a 2% premium would cost $20,000. While this is a significant expense, it is often a non-negotiable requirement for winning the job.
Industry-Specific Considerations
Construction and Trades
General contractors and subcontractors often face strict bonding requirements, especially for government contracts. Performance bonds assure project owners of completion, while payment bonds protect subcontractors and suppliers from nonpayment.
Freight Brokers and Logistics Firms
Freight broker bonds (BMC-84) differ from performance and payment bonds but share the same principle of ensuring obligations are met. Logistics projects involving government contracts may require performance and payment bonds in addition to federal requirements.
Auto Dealers
Auto dealer bonds guarantee compliance with state laws and payment obligations. Dealers working on government fleet contracts may also need performance bonds to ensure timely delivery of vehicles.
Startups in Regulated Industries
New businesses in construction, environmental services, or manufacturing sometimes face bonding requirements before securing contracts. Working with a surety expert like Single Source Surety can improve approval chances, especially for startups without long operating histories.
Compliance and Documentation Tips
- Keep all license and insurance documentation current
- Ensure project contracts clearly outline payment terms and timelines
- Maintain accurate accounting records and reconcile regularly
- Store supplier invoices and proof of payment for quick reference
- Have updated financial statements ready before bidding on projects
Common Mistakes to Avoid
- Waiting until the last minute to apply for bonds
- Submitting incomplete applications with missing documentation
- Assuming one bond type covers all risks
- Not notifying your surety provider about scope or timeline changes
- Allowing unresolved disputes with subcontractors to impact future bonding eligibility
Case Studies
Case 1: Construction Contractor on a Tight Timeline
A contractor in Florida was awarded a $4.5 million municipal building project with a 30-day start requirement. They needed both payment and performance bonds quickly. By preparing financials in advance and working with an experienced surety partner, they secured both bonds in under five business days.
Case 2: Auto Dealer Expanding into Fleet Contracts
A dealership bidding on a state law enforcement fleet contract needed performance bonding in addition to their dealer bond. Having an established relationship with a surety provider allowed them to meet the requirement and win the contract.
Case 3: Freight Broker Winning a High-Value Logistics Contract
A freight broker pursuing a military transport project needed bonding to meet federal compliance. Partnering with a surety provider helped them navigate both freight broker bond rules and additional project-specific bond requirements.
Best Practices for Managing Bonds
- Keep payment records for all subcontractors and suppliers
- Monitor project milestones and address issues early
- Maintain consistent communication with your surety provider
- Assess bonding needs before bidding on new projects
- Build a track record of completing projects on time and within budget
Additional FAQ
Q: Can you get bonded with bad credit
Yes, but expect higher premiums and stricter terms. Strong project documentation and a proven history of successful work can help.
Q: Are bonds refundable
Refunds depend on provider policies. Most premiums are nonrefundable once issued.
Q: How long does approval take
Simple projects can be approved within days. Complex or high-value contracts may take longer.
Q: Do bonds replace insurance
No. Bonds guarantee performance or payment obligations. Insurance covers loss or damage.
Q: Are bonds required for all private projects
No. Private owners set their own requirements, but many request them to protect investments.
Q: Can bonding capacity grow over time
Yes. Successful completion of projects and strong financial management can increase your bonding limits, enabling you to pursue larger contracts.
